McGraw Hill’s Taxation of Individuals 2022 Edition 13th Edition by Brian Spilker Solution manual
- [LO 3] Arnold and Lilly recently had a discussion about whether a sales tax is a proportional tax or a regressive tax. Arnold argued that a sales tax is regressive. Lilly countered that the sales tax is a flat tax. Who was correct?
Arnold and Lilly were both correct. A sales tax by definition is a proportional tax – i.e., as taxable purchases increase, the sales tax rate (i.e., the marginal tax rate) remains constant. For this reason, Arnold was correct. Nonetheless, when you consider that the proportion of one’s total income spent on taxable purchases likely decreases as total income increases, the sales tax may be considered a regressive tax. For this reason, Lilly was correct.
- [LO 4] Which is the largest tax collected by the U.S. government? What types of taxpayers are subject to this tax?
The federal income tax is the largest tax collected by the U.S. government. Currently, federal income taxes are levied on individuals, corporations, estates, and trusts.
- [LO 4] What is the tax base for the Social Security and Medicare taxes for an employee or employer? What is the tax base for Social Security and Medicare taxes for a self-employed individual? Is the self-employment tax in addition to or in lieu of federal income tax?
Employee wages is the tax base for the Social Security and Medicare taxes. Net earnings from self-employment is the tax base for the self-employment tax. The self-employment tax is in addition to the federal income tax.
- [LO 4] What are unemployment taxes?
Employers are required to pay federal and state unemployment taxes, which fund temporary unemployment benefits for individuals terminated from their jobs without cause. The tax base for the unemployment taxes is wages or salary.
- [LO 4] What is the distinguishing feature of an excise tax?
Excise taxes differ from other taxes in that the tax base on excise taxes is typically based on the quantity of an item or service purchased. The federal government imposes a number of excise taxes on goods such as alcohol, diesel fuel, gasoline, tobacco products and services such as telephone services. In addition, states also often impose excise taxes on these same items.
- [LO 4] What are some of the taxes that currently are unique to state and local governments? What are some of the taxes that the federal, state, and local governments each utilizes?
The sales, use, and property (personal, real, intangible) taxes are unique to state and local governments. Taxes that are common among the federal, state, and local governments include income taxes, excise taxes, and estate and gift taxes.
- [LO 4] The state of Georgia recently increased its tax on a pack of cigarettes by $2. What type of tax is this? Why might Georgia choose this type of tax?
The cigarette tax is both considered an excise tax (i.e., a tax based on quantity purchased) and a “sin” tax (i.e., a tax on goods that are deemed to be socially undesirable). Georgia may choose this type of tax to discourage smoking and because sin taxes are often viewed as acceptable ways of increasing tax revenues.
- [LO 4] What is the difference between a sales tax and a use tax?
The tax base for sales taxes is retail sales of goods (and some services). The tax base for the use tax is the retail price of goods owned, possessed or consumed within a state that were not purchased within the state (e.g., goods purchased over the internet).
- [LO 4] What is an ad valorem tax? Name an example of this type of tax.
An ad valorem tax is a tax based on the fair market value of property. Real and personal property taxes are examples of ad valorem taxes.
- [LO 4] What are the differences between an explicit and an implicit tax?
An explicit tax is a tax that is directly imposed by a government unit and easily quantified. Implicit taxes are the reduced rates of pretax return that a tax-favored asset produces (e.g., the lower pretax rate of return earned by tax exempt municipal bonds). Although implicit taxes are real and equally important in understanding our tax system, they are difficult to quantify.
- [LO 4] When we calculate average and effective tax rates, do we consider implicit taxes? What effect does this have on taxpayers’ perception of equity?
